PNG national development plans focus on local export growth

The bold National Trade Policy (NTP) 2017-32 – approved by the National Executive Council in April 2017 and unveiled in August that year – aims to rebalance Papua New Guinea’s trade flows, protect domestic producers and provide new incentives to local manufacturing investors.

Protection of local industry and national trade interests is heavily emphasised in the new policy, with the government already moving to implement several of its recommendations. For example, the authorities have suspended a long-standing scheme to reduce tariff imports, and are insisting on integrated safeguards for domestic producers in future trade negotiations. Other recommendations outlined in the NTP include the establishment of investor-oriented special economic zones (SEZs) and industrial fisheries zones, with a view to fostering the growth of local industries. However, compliance and enforcement of fair trade regulations and measures to combat illicit trade will remain critical concerns moving forwards, as widespread smuggling continues to weigh on the domestic trade outlook.

National Policy

Prior to 2017, PNG did not have a national trade policy. The Department of Trade, Commerce and Industry (DTCI) reports that in the absence of a strong policy framework, the country’s activities since attaining independence in 1975 have been steered by broad economic goals aimed at expanding macroeconomic growth. The department has described this approach as “largely inadequate” given that it downplays the importance of trade to economic growth and development.

To rectify this, the NTP calls for a host of reforms to improve trade and investment in PNG, beginning with the establishment of a transparent and predictable legal and regulatory framework, macroeconomic stabilisation, and reforms to improve governance and the investment climate. According to Richard Maru, minister of national planning, the NTP provides a framework for new trade agreements and negotiations, identifies sectors that hold a comparative advantage, and expands access to sectors with high potential for job creation.

The NTP is a key policy achievement for the DTCI, which worked in partnership with the EU under a series of trade-related assistance (TRA) programmes launched in 2009. Notably, this included the PGK20m ($6.2m) Phase 2 TRA programme that was implemented under a 2014 agreement between the EU and PNG under the auspices of the 10 EDF National Indicative Programme.

Rebalancing

The NTP identifies the large nonoil trade deficit as a key challenge to macroeconomic growth in PNG. Although the EU Commission reported that PNG has recorded a healthy trade surplus in recent years, with its trade balance shifting from a deficit of €238m in 2014 to hit surpluses of €1bn, €1.4bn and €1.9bn in 2015, 2016 and 2017, respectively, this is largely attributable to extractive exports. According to the Observatory for Economic Complexity, total exports amounted to $7.6bn in 2016, with petroleum gas exports accounting for around 28% of this, or $2.2bn. This was followed by gold, which represented 24% or $1.8bn; crude petroleum with $599m (7.8%); and copper with $388m (5%). Noting that the country’s services deficit was estimated at $4bn in 2015, the NTP states that this persistent deficit has underpinned the country’s ongoing foreign exchange shortage, which has been another critical growth inhibitor in recent years.

Policy measures set out in the NTP are aimed at reaching defined export targets. For example, the plan seeks to boost fish exports by 20%; palm oil by 19%; copra by 16%; coffee by 10%; and cocoa by 7%. It also envisions increasing domestic downstream processing capacity as well as diversifying merchandise exports and trade partners. Importantly, the plan focuses on growing PNG’s service exports, supporting the creation of 50,000 new small and medium-sized enterprises as well as jobs in the retail, tourism, ICT and professional services sectors. Key NTP goals include raising investment by between $5bn and $10bn over the years to 2022, reversing the services balance deficit to a surplus by 2027, boosting merchandise exports by $2bn, improving the balance of payments to reach a $100m surplus by 2027, and increasing monthly foreign exchange reserves from $1.6bn to $2.5bn. It also targets reducing the debt-to-GDP ratio from 38.4% in 2017 according to the IMF to 28.8% by 2027.

Export-Oriented

The NTP addresses tariffs as a policy instrument to protect agricultural producers against foreign imports, noting that high tariffs on sugar and poultry imports have had a positive impact on domestic industry. PNG began to roll out a tariff reform programme in 1999, introducing a value-added tax on goods and services to fund an import tariff reduction scheme. The World Trade Organisation reported that this roughly halved the average tariff rate to less than 10%.

However, the NTP states that the protective tariffs on products, such as those on poultry and sugar, have been progressively reduced to the point where many local producers in these segments fear that they will have to close due to increased competition from cheaper imports. NTP’s recommended policy measures include the establishment of SEZs to promote domestic manufacturing and value-added processing, as well as marine industrial zones for the fisheries industry. It also recommends increasing support for local feedstock, poultry and livestock activities; creating safeguards to protect local producers; and establishing anti-dumping guidelines. In terms of international trade, the policy recommends developing a list of agricultural goods designated as special or sensitive, which would be exempt from any planned tariff reduction measures included in future trade agreements. A number of these policy recommendations are already being implemented. For instance, when unveiling the policy, Charles Abel, deputy prime minister and treasurer, announced that the government had suspended its tariff reduction programme in order to balance its international trade rights and obligations.

“The country is at the forefront of tariff structural reforms, but when talking about tariffs, it is important to remember that although the scheme has been suspended, we are still well below the band rates with regard to tariffs right now,” Clarence Hoot, acting managing director of PNG’s Investment Promotion Authority (IPA), told OBG. “Most industries pay below 10%, and only three industries have tariffs that are above 20%.” As such, the 2017 supplementary budget introduced tariff hikes for a number of products, with a view to increasing revenue generation and supporting domestic industries. Consultancy firm Deloitte reported that these included tariff increases ranging 2.5-10% on imported foods such as eggs, meat and cooking oil, which are already produced locally in PNG.

“What the government really understood in this current budget was that if there is a competitive local industry and enough competition within it, imports are not as necessary,” Ashlon Chue, marketing manager at Pacific Industries, local manufacturer of fast-moving consumer goods, told OBG.

Enforcement Problem

Although these measures represent a step in the right direction, domestic producers report that there are still significant challenges due to persistent and pervasive unfair trade practices, as well as a lack of compliance and enforcement. The NTP document stated that local manufacturing industries have alleged that certain trading partners regularly engage in dumping. This is especially challenging because there is no established government process to authenticate claims and take remedial action, leading to significant economic losses. In September 2017, for example, British American Tobacco reported that the country was losing PGK250m ($78m) of revenues annually to cigarette smuggling. Although the government established a taskforce to monitor illicit trade in July 2016, PNG Customs reported in January 2018 that the incidence of illicit trade had risen over the previous six months, particularly in cigarettes.

“There’s a significant difference between the value and volume of goods coming in and out of the country, compared to what is captured and recorded,” Chey Scovell, CEO of the Manufacturers Council of PNG, told OBG. To this end, the authorities are moving to create a national trade office (NTO) and associated trade information centre. This independent entity will be responsible for administering trade affairs and implementing the NTP.

The NTO was not operational as of August 2018, but the IPA has said it is expected to open before the end of the year. In addition, an upcoming National Trade Act is set to formalise the role of the NTO.